Billions in write-downs on derivates and other losses related to mortgages put insurer American International Group Inc. deeply in the red during the fourth quarter, and the company expects another “significant operating loss” at its mortgage insurance division in 2008.

AIG said a $5.3 billion fourth-quarter loss was largely driven by $11.2 billion in write-downs of credit default swaps that cover investments with exposure mortgages.

AIG also reported a $2.63 billion fourth-quarter capital loss related to the reduced value of its investment portfolio, and a $643 million charge related to investments held by its financial products unit, AIG Financial Products Corp.

The fourth-quarter losses put a considerable dent in the company’s profits for the year, which totaled $9.3 billion, down nearly 40 percent from $15.4 billion in 2006.

In a press release, the company said it expects U.S. housing markets to remain weak and that credit market uncertainty will likely persist in 2008, which could force AIG to report additional unrealized market valuation losses and impairment charges.

AIG’s insurance and financial services subsidiaries invest in mortgage-backed securities (MBS) and collateralized debt obligations (CDOs) backed in whole or in part by residential mortgage loans. AIG Financial Products Corp. provides credit protection through credit default swaps on certain super senior tranches of CDOs.

AIG also has exposure to losses in mortgage lending through its residential mortgage insurance unit, United Guaranty Corp. (UGC), and through loans originated by its American General Finance Inc. subsidiary.

UGC reported an operating loss of $348 million in the fourth quarter of 2007, compared with operating income of $27 million in the same quarter a year ago. The mortgage insurer saw a $637 million operating loss for the year, compared with operating income of $328 million in 2006, as losses on first- and second-lien loans more than tripled from 2006.

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